ECB to Give First Indication of Three-Year Loan Repayment

The European Central Bank, seen in this photo, still allows banks to borrow as much money as they want against eligible collateral for periods of one week, one month and three months. Some economists say this reduces the importance of the three-year loans being repaid. Photographer: Ralph Orlowski/Bloomberg

Jan. 25 (Bloomberg) -- The European Central Bank will give
a first indication today of how much of its 1 trillion euros
($1.33 trillion) in three-year loans banks plan to repay early.

In a statement at around noon in Frankfurt, the ECB will
say how much of the first three-year loan banks have pledged to
hand back at the first early-repayment opportunity on Jan. 30.
They will initially repay 84 billion euros, according to the
median of 10 estimates in a Bloomberg News survey of economists.
Some 150 billion euros of the first loan, which totaled 489
billion euros, will be given back early as banks continue to
repay the funds over coming weeks, the survey shows.

The ECB flooded financial markets with two tranches of
three-year loans a year ago to avert a credit crunch after banks
stopped lending to each other because of Europe’s sovereign debt
crisis. Banks have the option of repaying the loans, which were
lent at the average of the ECB’s benchmark rate over their
duration, after a year. While today’s data may give an insight
into the health of banks amid signs the debt crisis is abating,
economists cautioned not to read too much into them.

“Even if the first amount is lower than expected, we might
still see higher amounts in the weeks to come,” said Nick
Matthews, senior euro-area economist at Nomura International in
London. “It may be a marathon rather than a sprint. I don’t
expect the first announcement to have a huge impact on the money
market.”

Market Rates

The prospect of banks repaying the so-called Longer Term
Refinancing Operations early and draining money from the system
has driven up interest rates in the futures market. The rate on
three-month Euribor futures expiring in December 2013 rose as
high as 0.54 percent on Jan. 18, the most since July and up from
0.23 percent at the start of the year. It was at 0.42 percent
today.

The ECB’s non-standard policy measures, ranging from the
LTROs to an as-yet untapped bond-buying program, have helped to
calm financial markets and reduce borrowing costs. ECB President
Mario Draghi suggested this month that the worst of the three-year debt crisis may be over. The ECB expects the 17-nation euro
economy to emerge from recession later this year.

Early repayment of the loans is “a positive signal,” ECB
council member Ewald Nowotny said this month.

Lloyds Banking Group Plc, Britain’s second-biggest
taxpayer-assisted lender, intends to repay most of the 11.4
billion pounds ($18 billion) of three-year loans it borrowed
next month, according a person with knowledge of the plan who
declined to be identified. The bank will repay about 8 billion
pounds of the money on Feb. 27 -- the first opportunity for
repayment on the second LTRO -- the person said.

The second three-year loan totaled 529 billion euros. Early
repayments of that tranche will amount to 138 billion euros,
according to the Bloomberg survey. That would result in 288
billion euros of the total 1 trillion euros being given back
early.

From today, the ECB will issue a weekly estimate of LTRO
repayments.

The ECB still allows banks to borrow as much money as they
want against eligible collateral for periods of one week, one
month and three months. Some economists say this reduces the
importance of the three-year loans being repaid.

“If a bank finds out it has returned too much money and
faces liquidity problems, it still has the option to get an
unlimited supply of money from the ECB,” said Joerg Kraemer,
chief economist at Commerzbank AG in Frankfurt. “The LTROs are
only one piece of the entire puzzle.”